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Credit Worthy News

Transforming Historic Main Street using HTCs

Posted by Albert Rex on Thursday, December 10, 2015

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Downtown Waxahachie, TX | Photo from city-data.com

Main Street seems to be on a lot of people’s minds. We are encouraged to “shop small” by American Express and the National Main Street Center on the Saturday after Thanksgiving in ads with fall foliage-lined streets. Political candidates evoke “Main Street” to show their support for small business ownership.

Last month I got to spend some time in Waxahachie, Texas at the Texas Downtown Development & Revitalization Conference where I had the chance to talk about the use of historic tax credits on America’s Main Streets. I shared my panel with Michael Scott, Assistant City Manager for Waxahachie, who discussed all of the other tools in the toolkit for Texas downtowns. While MHA has the opportunity to work on many large projects in world-class cities and rural communities across the country, it is important to talk about Main Streets and how the HTCs can help revitalize them.

Shortly before attending the conference, the Historic Tax Credit Improvement Act of 2015 (HTCIA) was filed in congress by Rep. Mike Kelly (R-PA) and Rep. Earl Blumenauer (D-OR). According to the National Trust for Historic Preservation, the legislation makes long overdue changes to the federal Historic Tax Credit to further encourage reuse and redevelopment in small, midsize and rural communities. They feel that main streets across America will have a stronger tool to help breathe new life into their historic buildings. This appears to be the case as the bill includes an increase of the credit from 20 to 30 percent for projects with rehabilitation expenses of less than $2.5 million. This would certainly help inject new private investment into smaller and more rural communities. 

The bill includes other improvements such as simplifying the process for the transfer of historic tax credits to investors for projects under $2.5 million. If passed it would be the first major changes to the federal Historic Tax Credit since the 1986 tax bill and would have a large impact on smaller projects, whether they are on Main Street or a rural byway.

Main Street projects tend to be smaller in size and are often undertaken by an existing owner as opposed to a new developer. The tax credit syndication process, finding and bringing an investor into these smaller transactions, can be a difficult one as the legal and accounting costs for deals of this size can be the same as the costs for projects two to three times this size, resulting in less money for the project. The good news is that there are ways to mitigate some of these issues relative to scale. For instance, a local bank that is financing the project might be able to utilize the federal credit making the transaction much less cumbersome from an accounting and legal perspective. In some states, like Texas, the state tax credits can legally be transferred or sold making them real equity in the project. Transaction costs for state credits are minimal resulting in a greater net proceed for the project. And in some cases, the owners of the buildings may be able to utilize the federal credit themselves as they are a dollar-for-dollar reduction in federal income tax.

Main Street projects can benefit from the use of HTCs if the owner/developer is willing to be patient and put together the right project team. Local economic development organizations (like Main Street Programs) and state officials are knowledgeable about additional Main Street incentive programs that exist and how they can be used together to make a small-scale historic rehabilitation work.

And we know for certain that America benefits from our historic Main Streets. Main Streets are often some the most architecturally significant collection of buildings in a town. Even in small rural areas, people are returning to their historic commercial districts to shop or live. Historic tax credits are often an untapped tool for the rehabilitation of important resources but like most of our projects the rehabilitation of one has a catalytic impact to spur development of many and transform the Main Street landscape.

Topics: policy

Functionally-Related Complexes and the NPS

Posted by Bill MacRostie on Thursday, October 22, 2015

Harmony Mills | Cohoes, New York (Photo credit: The Lofts at Harmony Mills)

A developer taking on a project involving a group of buildings that served together historically is likely to visit an arcane corner of NPS world called the functionally-related complex policy. Military bases, hospital complexes, industrial complexes, and many other groups of buildings all come under the umbrella of what NPS regulations define as a single resource AND if a single developer or related developers takes on a phased project involving two or more buildings in the group, then the project will be required to file a single Part 1, 2 and 3 application, and will not receive a Part 3 approval until all phases are complete.  

Clearly, where a phased project can be completed within a 24-month construction period, the issue of a single application and receipt of a Part 3 approval at overall project completion is manageable. Where our clients run into trouble—in addition to the design-related issue like the demolition of seemingly unimportant buildings—is when a multi-building project stretches over several years with early phases completed and placed in service, but not receiving a Part 3 approval to close the phase out.

Having early phases hanging out with no Part 3 approval creates at least two issues for developers and investor:

  • First, to the extent there’s an equity hold-back awaiting receipt of Part 3 approval, that hold-back will continue in place until later phases are complete, which in some cases could be years.

  • Second, if there are different lenders or investors for separate phases of work, those parties’ risk increases with time passing and development activities occurring that they may not have control over.

MHA has been successful over the years finding some limited solutions to the NPS’s functionally-related policy, but they have been one-off answers that have not necessarily led to written policies. We are currently leading an effort on behalf of the Historic Tax Credit Coalition to come up with some broad, permanent solutions that NPS will be willing to apply as overall policy guidance.

Stay tuned in the coming months for more news about that industry initiative.

Contact us with your questions

Topics: policy

Gov. Brown Leaves No Doubt About Future of State Historic Credits in California

Posted by Bill MacRostie on Wednesday, October 7, 2015

I’m attending the ULI Fall Meeting in San Francisco, and it’s a fantastic conference with heavy emphasis on future tech and demographic trends; their likely impact on cities, development and land use.

In a fascinating session at the end of the day Tuesday, George Marcus, Chairman of Marcus and Millichap, sat down with Gov. Jerry Brown and discussed topics ranging from closing the state’s $27 billion budget gap, possible reforms to the California Environmental Quality Act, the California drought, and the impact on California and the world of climate change.

As the session was wrapping up, the last question from the audience was from Brandon Hill of Fusion Advisory Services in Birmingham, AL. In an implied reference to the governor’s 2014 veto of a new state historic tax credit bill passed unanimously by both houses of the California legislature, Brandon pointed out the positive impacts across America of state and federal historic credits, and asked the governor about his views on the subject.

Brown responded with an account of the arcane budget rules in California where a tax incentive can be enacted by the legislature with a simple majority but rescinded only with a two-thirds majority, thus having the practical political effect of permanence in the tax code. Further, he felt the historic credit bill was a one-off effort relating to a single issue, while his preference would have been for a larger bill that took a more holistic view of development incentives. This seemed like a rational, reasonable defense of his veto.

Then…

The governor went on to describe in surprisingly personal and bitter terms a couple of his past encounters with the preservation community. While living in Sacramento in a residential loft building, he was prevented from installing double-paned windows with improved acoustics so that when the bar downstairs closed in the middle of the night, the patrons on the sidewalk downstairs would wake him up. And, while he was mayor of Oakland, the preservation interests blocked the demolition of a “tired, non-descript little building,” thereby preventing the development of a major project the he supported. He said, “in general, it’s just hard to develop in historic areas because of all the requirements.”

His last comments when the session wrapped up was, “Yeah, historic credits in California…don’t hold your breath.”

Well, at least we know where we stand and who we have to convince.

Topics: policy, HTC

North Carolina Rehabilitates Historic Tax Credit

Posted by Richard Sidebottom on Friday, October 2, 2015

NODA Mills | Charlotte, NC
NODA Mills | Charlotte, NC

For many years, North Carolina was the poster child for healthy historic tax credit programs (HTCs). It was a shining example of how a state program can spur private real estate and economic development. Numerous historic rehabilitations testify to the success of the former HTC and North Carolina Mill Tax Credit programs. Some impressive examples are Wake Forest Biotech Place in Winston-Salem, a master-planned development that transformed the former R. J. Reynolds Tobacco Company complex into offices and research laboratories, and the many abandoned mills around Charlotte brought back to life as affordable housing, breweries and mixed use developments. With a user-friendly state tax credit program and the outspoken support of a strong statewide preservation organization, Preservation North Carolina, the state was a hotbed for historic rehabilitations, with the sixth highest number of projects in the country just prior to. In 2014, 44 rehabilitation projects received Part 3 approvals with a total of more than $56 million spent by the private sector on qualified rehabilitation expenditures (QREs).

That is why it was so disappointing that the state HTC and the state Mill Tax Credit programs were allowed to sunset at the end of 2014. Even before the HTC was gone, a campaign driven by Governor Pat McCrory and Secretary Susan Kluttz of the Department of Natural and Cultural Resources was underway to reinstate some form of these instrumental revitalization programs for the Tar Heel State. According to the 2014 report, Decades of Success: The Economic Impact of Main Street in North Carolina, sponsored by the North Carolina Department of Commerce and North Carolina Main Street Communities, nearly 300 projects in Main Street districts alone used the historic tax incentive between its inception in 1998 and 2013, with private investment totaling over $190 million in rehabilitation costs.

Good news came in the last few weeks from the North Carolina legislature! A revised tax credit program combining the HTC and Mill Tax Credit programs was included in the budget bill recently passed by the legislature and signed by Governor McCrory. While final details of the program are subject to change, the program should begin on January 1, 2016 and will include the following:

RATES 

  • Income-Producing (combines Commercial & Mill)
    • Reduces base credit rate to 15%
    • +5% for mill ($3M spending requirement has been eliminated)
    • +5% for economically distressed counties
  • Home-owner Residential
    • Reduces to 15% credit
    • Applies a cap per project QRE @ flat project ceiling ($150K)
    • $10,000 minimum over 24 months

CAPS

  • Income-Producing (combines Commercial & Mill)
    • $0 to $10M base rate
    • $10M to $20M base rate reduced by 5%
    • Hard cap at $20M
  • Home-owner Residential
    • $150,000 cap

INSTALLMENTS
Can now be claimed all in one year. All credits claimable once building is placed into service with a 10-year carry forward.

TAXES CLAIMABLE AGAINST
Combined credits claimable against income taxes, grow premium taxes and corporate franchise taxes. 

The combination of the above results in a maximum per project cap of $4.5 million. This may not be as generous as the combination of the previous programs, but it will have a positive impact on a majority of the potential projects in the state and spur continued economic development. 

The North Carolina SHPO will be promulgating new regulations in the coming months and we will make sure to provide updates.

Contact us if you would like to know how these or other state HTCs can bring equity to your historic rehabilitation project. 

Topics: policy, North Carolina, HTC, MHA Southeast

The Financial Benefits of Chicago's Class "L" Designation for Historic Properties

Posted by MacRostie Historic Advisors on Thursday, September 10, 2015
Wrigley Building | Photo Credit: Jon Miller of Hedrick Blessing Photographers
Wrigley Building | Photo Credit: Jon Miller of Hedrick Blessing Photographers


Chicago appreciates its architecture more than most cities. And it should. This city was the crucible for arguably the most influential American architectural events in the late 19th and early 20th centuries:  the 1893 World’s Columbian Exposition which sparked a renaissance of neoclassical architecture throughout the country, and birthplace of the skyscraper, a product of “Chicago School” engineering, innovation, and design.

Chicago is also a leader in creating developer incentives for the preservation and reuse of historic buildings. Acknowledging the positive impact of the City’s historic built environment on the local and regional economy, the Cook County Class “L” Property Tax Incentive Program was created in 1997 to offer specific financial incentives for rehabilitation of buildings designated as Chicago Landmarks. 

Under the Class “L” program, owners of qualifying commercial and industrial properties designated as “landmarks” and undergoing “substantial rehabilitation” can have their property tax assessment levels reduced for a twelve-year period.  Where commercial and industrial properties are typically assessed at 25% of market value, Class L buildings are assessed at only 10% for ten years, 15% in year 11 and 20% in year 12.

Old Republic Building To qualify, owners must invest at least 50% of the Assessor’s full market value of the landmark building in an approved rehabilitation project and must be determined a Class “L” property prior to the commencement of construction. The ordinance is intended to foster projects that contribute to long-term growth in the economy, employment opportunities, and property tax base of the city and Cook County.
The incentive applies to the assessment of the building only. The land continues to be assessed at the standard levels of assessment for commercial property and industrial property (i.e., 25% of market value), except where the entire building has been vacant for at least 24 continuous months prior to application for the incentive, in which case, the incentive assessment levels apply to the land as well as the building.

In Chicago, developers frequently utilize the Class “L” incentive in conjunction with the federal 20% historic rehabilitation tax credit as the two programs share many of the same requirements:

  • Both require that a building be designated as historic (that means Chicago Landmark status for the Class “L” program and National Register designation for the federal program).  
  • Both require a baseline investment in the rehabilitation work (that’s 50% of the Assessor’s opinion of the building’s full market value for the Cook County program and 100% of the building’s adjusted basis for the federal tax credits).  
  • And under both programs, the rehabilitation work is required to meet the Secretary of the Interior’s Standards for Rehabilitation.

 

Virgin HotelIn our experience and in that of our clients, these incentive programs generally complement each other and there is often an economy of scale in pursuing concurrent applications and coordinating project reviews with the applicable local, state, and federal agencies.
The programs are also complementary in how they deliver financial incentives for a rehabilitation project. The federal program provides a tax credit equal to 20% of total qualifying rehabilitation expenses (both hard and soft costs) that can be monetized to bring equity into a transaction while the project is under construction.  The Class “L” is a benefit that impacts annual operating expenses.

It is worth noting, that the proceeds of federal historic tax credits may not be used to satisfy the Cook County investment requirement.

Given these considerations, it is clear why developers are actively utilizing the Cook County Class “L” Property Tax Incentive, a powerful preservation tool for the City of Chicago that is much more carrot than stick.

Post by Allen F. Johnson, Partner | Director, MHA Midwest and special contributor Elizabeth L. Gracie, Partner in the law firm, O'Keefe Lyons & Hynes

Topics: policy, Chicago, O'Keefe Lyons & Hynes, HTC, MHA Midwest